Australia | Apr 12 2013
– Picture better than a year ago
– US recovery slow, EU flat
– Chinese growth stable
– Japan may lose momentum
By Greg Peel
It is a truth now universally acknowledged that one of the most reliable ways to get a handle on the strength or otherwise of an economy is to regularly survey a sample of purchasing managers at private (and in some cases state-run) corporations and ask for responses to a set of questions covering various aspects of everyday business. The responses are tabulated and aggregated to produce a number based on 50 being the point at which a business sector is neither expanding nor contracting, and all values thereabouts signifying the pace of expansion or contraction. This number is known as a purchasing managers’ index or PMI.
PMIs are now measured in economies across the globe from the developed world to the emerging world covering the manufacturing sector and non-manufacturing sectors, often divided into services and construction. PMIs offer a clear and immediate indicator as to the trend of GDP performance long before actual GDP results which, with the exception of China, are usually released in final form some three months after the end of a quarter.
Looking at the recently released March round of PMI releases, the economists at Danske Bank suggest the global economic recovery is “intact but still fragile and patchy”. In manufacturing terms, the US PMI fell unexpectedly in March and the eurozone net PMI fell more than expected but an offset was provided by improvement in Asian PMIs, with China yet again proving one should ignore data from the month in which the lunar new year falls and Japan beginning to show signs of confidence in a fresh approach to monetary stimulus.
For the economists at Standard Bank, recent global data suggests the developed world is yet to achieve “escape velocity” from the gravitational pull of the GFC and its aftermath, and the US is the leading example. The US recession basically bottomed out in mid 2009 and by the first quarter 2013 Wall Street had regained the ground lost from the tipping point in late 2007, yet five years on the US economy still needs the significant support of the Fed in order not to fall back into recession. The Fed will continue to provide support until the US recovery can finally prove self-sustaining.
Standard Bank nevertheless acknowledges that despite the need for ongoing central bank support, in the US and elsewhere, the global economy is in better shape than it was 12 or 24 months ago. The housing sector usually leads the US economy into recovery and it has continued to build on advances that began a year ago. As much as a relief as this might be, Standard points out that the not insubstantial improvement in the US housing market to date still only takes the sector back to trough levels of previous cycles.
It would also appear US businesses and households have weathered the “fiscal cliff” elements to date, although the fallout may yet to be truly felt, Standard acknowledges (last week’s US jobs number may be an ominous example). The US economy is nevertheless growing albeit at a “painfully slow” rate, with recovery in the all-important sector of small business yet elusive. The Fed has pledged to support the economy until the unemployment rate falls to 6.3% but at the current rate of progress this target could be “years away”, the economists suggest.
At least the central bank’s role in the US is clear cut and well established which cannot be said for the European Central Bank and its responsibilities and powers within the eurozone. These have largely been established on the run, “by dint of necessity”, Standard Bank suggests, as the GFC aftermath has thrown up previously unforseen problems. The ECB’s response has not always been too well thought out, with Standard citing the provision of cheap short term loans to banks via the questionably named “Long Term Refinancing Operation” (LTRO) which initially encouraged confidence but soon backfired and exacerbated the sovereign debt crisis.
The latter Outright Monetary Transactions (OMT) policy has been very effective in bringing down bond yields in the peripheral countries and reducing systemic risk (by threat – OMT is yet to be deployed) but in so doing has undermined pressures to reform, Standard believes. The problem with austerity is that the subsequent economic slowdown makes it even harder to reduce budget deficits, and while the problem is obvious in the likes of Greece and Italy it is now also providing an issue for the likes of France and Holland.
Given the eurozone’s slide back into recession last year, disappointingly slow growth is expected to persist into 2013. The ECB is now holding off on any further support for the economic bloc having provided, in its view, sufficient encouragement to date. Now it’s up to zone governments to do there bit to bring about structural reform. While the US is expected to post GDP growth in the region of 2% in 2013, the eurozone is expected to be flat.
Somewhere in between the US and the eurozone lies the UK, in which tight fiscal policy is being matched with loose monetary policy. The Bank of England is not quite as easy with the printing presses as the Fed, but the UK economy is “far from healthy”, Standard suggests, and is expected to grow by around a mere 1% this year.
In contrast is China, in which Standard notes the mantra for economic change remains “continuity” and “gradualism”. This implies no dramatic changes under the new regime, and a GDP growth rate of 7.5 to 8.0%.
Continuity and gradualism have not worked for Japan, nevertheless. Nor, for that matter, have various more aggressive policies attempted over the past 20 years worked either, which is why Prime Minister’s Abe’s fresh approach has been met with some degree of scepticism. Yet Abe has impressed many with his attitude to the challenge, the Standard Bank economists note, and perhaps a stated 2% inflation target holds the key.
As to whether even this “shock and awe” approach proves sufficient to finally drag Japan out of its malaise is nevertheless a case in point, Standard warns, with an ageing and shrinking workforce, a lack of competition and a severe energy crisis offering constraints. Unless these issues are addressed, the current stock market-backed upswing may eventually run out of momentum.
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